Tuesday, January 27, 2009

What will stop the relentless downward spiral of job loss, spending reductions, and more job loss? How will the recovery start?

If a recent meeting at a Starbucks is any indication, it will begin the same way it began: through blind faith and leverage.

The “meeting” was a loud brainstorming session among three would-be Anthony Robbins-type motivational coaches, hatching a plan for some kind of personal-leadership seminar, for which they had plenty of great, great, great ideas—to use the most operative adjective of the planning session—but, as the junior member of the triumvirate timidly pointed out, no capital to implement.

“Ah, not a problem,” the ringleader said, in the same, fast, every-downside-has-an-upside way he had been loudly but unintentionally sharing his plans with everyone within ten feet of the group: “We’ll use credit cards.”

He then explained how you could borrow all the money to market the event on “one of those no-interest-for eighteen months” credit cards, and afterwards pay it all off with the proceeds of the seminar.

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Thursday, January 22, 2009

As the headline above declares, the folks at Morningstar recently named their new “CEO of the Year.”

And this year, they bequeathed that honor on Warren Buffett, Chairman and CEO of Berkshire Hathaway.

You might be wondering why it took the Morningstar folks fifty years to give the award to the “Oracle of Omaha.” Even the folks at Morningstar admit there doesn’t seem to have been a good reason except that they never got around to it:

We have contemplated naming Warren Buffett CEO of the Year every year since we created the award, and this year we finally get the chance to officially acknowledge all that Buffett has done for Berkshire Hathaway (brk.a.A) (brk.b.A) shareholders, both over the decades as well as in 2008.

Now, Buffett might want to think about giving that award back.

After all, in 2004, Morningstar was too busy naming Herb and Marion Sandler co-CEOs of the Year to give it to Warren.The Sandlers, of course, had spent forty years building Golden West Financial into the second-largest savings and loan in the country, thanks to the innovation—first stumbled on by Marion Sandler during an analyst stint at Oppenheimer—of variable-rate mortgages. And they would go on to even greater fame and fortune by selling out in 2006 at about as close to a top as ever existed, to Wachovia, for $25 billion smackers.

Unfortunately, that was about $25 billion too much. The fallout from that deal would later force Wachovia into the arms of Wells Fargo—ironic, considering Buffett’s Berkshire Hathaway is a long-time Wells Fargo shareholder.

And back in 2001, Morningstar cheerfully named Jorma Ollila of Nokia its CEO of the Year 2000, which was about as close to the peak of Internet/Telecom Bubble as, well, Golden West’s sale to Wachovia was to the peak of the Housing Bubble. (But don’t expect Berkshire to rescue Nokia any time soon: Buffett, as nearly everyone already knows, doesn’t do technology.)

Still, if any CEO deserves the Morningstar award, Buffett would have to be number one, or maybe two, behind Steve Jobs, on anybody’s short list.

After all, Buffett predicted the current financial calamity—if not its timing and its intensity—more than five years ago, when he warned against derivatives in his annual shareholder letter, calling those wildly popular financial innovations “ticking time bombs” and “financial weapons of mass destruction.”

And thanks to that foresight, his company, Berkshire Hathaway, is about the only financial entity still standing, in a landscape of horrific desolation, with much the same financial strength as it had before the bombs started going off. Indeed, Berkshire is now one of a handful of true Triple-A balance sheets left in the world.

So bad looks the landscape that the press has been having a field day coming up “Worst-Since” headlines: Worst decline in U.S. householder net worth since records began in 1952; Worst manufacturing orders since records began in 1948; Worst consumer confidence since the Pearl Harbor year of 1942; Worst home price declines since the Great Depression; Worst year for the S&P 500 since 1937.

But there's one “Worst Since” headline that hasn't made the list just yet, and won't until the Berkshire Hathaway annual report is released at the end of next month: Warren Buffett’s worst year since—well, since he began investing other people’s money in 1956.

Now, we are not talking about the decline in Berkshire’s stock price last year—it was down 32% in 2008, as CNBC reported breathlessly on the first day of the New Year, before adding quickly that he still “beat the S&P 500”.

We’re talking about what Warren Buffett cares most about: the annual increase (or, in this, case, decrease) in Berkshire Hathaway’s economic value—which Buffett measures by the company’s book value per share.

Near as our computers can calculate, Berkshire’s economic value declined something like $10 billion in 2008, or $6,500 per share—an 8% decline. That would be only the second time in Berkshire’s history that the company has suffered a decline in its net worth—the first being in the year 2000, when Berkshire’s book value per share declined 6.2%.

Don’t hold us to these numbers: only Buffett himself, and a few of the 19 individuals who staff Berkshire’s home office in Omaha, know for sure. Berkshire being an insurance company with many moving parts, including a very large derivatives book, we could be off on this.

Indeed, the folks at Morningstar seem to think Berkshire suffered not at all:

And while 2008 was an exceptionally difficult year for just about all investors, it was much less trying on Berkshire Hathaway and its shareholders. Berkshire's balance sheet equity should be roughly flat from a year ago once the books are closed on 2008 [emphasis added]….

We’re not sure where Morningstar is coming up with this “roughly flat” thing.

While Berkshire’s shareholder’s equity was roughly the same at the end of the third quarter of 2008 as at the end of 2007 ($120 billion or so), it would appear to have suffered a very large whack in the fourth quarter of 2008.In fact, Berkshire foreshadowed the potential decline in its third quarter 10Q:

Subsequent to September 30, 2008, conditions in the pubic debt and equity markets have declined significantly resulting in exceptional volatility in debt and equity prices. Such volatility has impacted the fair value of Berkshire's investments in equity securities and derivative contract liabilities for equity index put option contracts. Based on equity and equity index prices as of October 31, 2008...Berkshire estimates that consolidated shareholders' equity would decline by approximately $9 billion.

Where things stood at December 31, 2008, we won't know until the annual report is out in a few weeks. However, based on our own calculations, the value of the common stocks held by Berkshire declined by what looks like a good $12 billion, and very likely more, in the fourth quarter of 2008.

Second, Berkshire has a huge derivative exposure that likely cost it billions of reported losses, which is ironic to some, given Buffett’s loudly voiced skepticism regarding these “ticking time bombs,” but understandable since Buffett never shies from attempting to make money where he sees opportunity.

As Berkshire reported in the paragraph quoted above, it saw a further significant unrealized, non-cash loss on derivatives—mainly on index puts Buffett sold in recent years—subsequent to the end of the third quarter. Given that markets got even worse after the 10-Q was issued, Berkshire should show an even stiffer unrealized, non-cash losses in the fourth quarter than the $2 billion or so already booked in previous quarters.

Based on our rough math, those equity and derivatives hits could add up to as much as a $20 billion in pre-tax losses. Adjusting for income taxes, we’ll call it a $15 billion reduction in Berkshire’s book value as of December 31, compared to the $9 billion Berkshire cited as of October 31.

Offsetting those large losses should be at least two pluses.

First, the earnings from Berkshire’s own businesses, which could be anything (Buffett does not tinker with earnings the way virtually all companies do; and insurance earnings are notoriously volatile) from a little to a lot. But we’ll guess—generously, we think, given that most of Berkshire’s businesses have suffered along with the economy in recent months—the 2008 fourth quarter earnings will come in equal to the prior year’s fourth quarter, at $3 billion.Second, Berkshire should realize at least a $1 billion pre-tax gain from its aborted bid for Constellation Energy, and could also realize non-cash gains deriving from the odd fact that Berkshire’s creditworthiness came under question during the fourth quarter. Weird as this last may seem, the fact that the cost of insuring Berkshire debt rose substantially during the quarter could theoretically reduce the value of the Berkshire losses on its derivatives book. (How this actually will affect the company’s shareholders equity, we don’t have a clue).

So, in round numbers, the $15 billion hit Berkshire could take from equities and derivatives, offset by $3 billion in income plus at least a possible gain of up to $1 billion on other investments, nets out to a guesstimated $10 billion decline in Berkshire’s book value.

That’s a $6,500 decline in book value per share, or 8%, and only Berkshire’s second decline since Buffett took control in 1965.

More remarkably, it is only Buffett’s second down year in his professional life, because in the 13 years he ran his hedge fund before shifting his focus to Berkshire, he never had a down year.(Yes, Warren Buffett ran a hedge fund. It was called Buffett Partnership Ltd, and the irony here is that Buffett likes to bash hedge funds for their egregious fee structures, which can reach a 2% management fee plus a 20% incentive fee on profits. Buffett's fee structure was a healthy 25% incentive fee on annual profits above 6%, but no management fee.)

Relative to the S&P 500—a measure Buffett provides in his annual report—Berkshire's 2008 decline, which we estimate at 8%, was quite benign. The S&P declined 37%, including dividends, hence Berkshire’s relative result, which Buffett also highlights in his annual report, was a 29% positive outperformance against the market.

So despite the down year in 2008, Berkshire has still underperformed the S&P 500 in only five years of the last 43. This has generally happened when the market was recovering from a weak market: 1967, 1975, 1980 (Oil Crisis), 1999 (the Internet Bubble) and 2003.

But Buffett has never lost this much money, assuming these numbers are close to correct, in his life.

Now, nobody’s crying for Warren Buffett.

His investors are as loyal as those Jonestown Kool-Aid drinkers—and for good reason. His track record has no match. And unlike Bernard Madoff, he’s as open about his methods as Paris Hilton about her sex life.

But Buffett is, above all things, competitive. (He told his first wife when they were married he wanted to be the richest man in the world; decades later she told Charlie Rose it really didn’t thrill her any—she had expected to marry a doctor or somebody who was going to help the world, not pile up money).

And if our numbers are right, Buffett just had his worst year since he started managing other people’s money back in 1956. Furthermore, it all pretty much happened in just three months.

Now, a good chunk of the “loss” comes from a derivatives book that Buffett is not selling any time soon. Assuming the world doesn’t come to an end, those near-term losses should reverse in future periods.

Furthermore, Buffett is famous for, among many other things, regarding a short-term drop in the value of an investment as a blip on the long-term scale. Once he’s made up his mind about the value of an investment, he doesn’t allow the market’s manic-depressive moods to affect his own perception of that investment’s value—an almost unique trait in a market of manic-depressive investors who see signals in every uptick and downtick on the screen.

But any decline in Berkshire’s net worth—even a modest 8% decline, even in a down 37% market—is, we’d bet, to the man who once said “The first rule of investing is not to lose; the second rule is not to forget the first rule,” unlikely to make him feel like the world’s best CEO right now.Especially considering his early foresight, and consistent warnings, about the credit crisis that has engulfed the world, and damaged his substantial equity portfolio.

So it will be most interesting to be in Omaha at the annual meeting this year, and hear directly from the Oracle himself, what, if anything, he thinks of the recent Morningstar glory.

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

In October 2003, Apple Founder and CEO Steve Jobs is diagnosed with pancreatic cancer—normally a swift death sentence. Fortunately, however, Jobs has a less-bad form (see “Steve Jobs: 42% vs. 4%” in these virtual pages, from December 18, 2008), which Jobs attempts to treat without surgery.

Meanwhile, ignoring Reg FD (Regulation Fair Disclosure, requiring material information to be disclosed publicly to all investors at the same time) Apple’s Board of Directors keeps mum on the fact that Steve Jobs has anything at all.

In July 2004, Jobs undergoes a very intense surgical procedure on his pancreas. In a subsequent email to the Apple community he says he is “cured.”

Now, the five-year survival rate for the type of pancreatic cancer Jobs apparently had is just 42%, which seems great compared to 4% for the bad kind—but is still less than 50-50. The 10 year survival rate is 22%, according to the National Cancer Institute. Hardly a “cure.”

And while anybody could look that stuff up, few apparently do: Wall Street doesn’t blink, and neither does most of the press. Steve had a “good” kind of pancreatic cancer, the story goes, and he’s cured. End of story.

But it is not.In August 2006 Jobs speaks at Apple’s World Wide Developers Conference, looking decidedly gaunt, and the blogosphere goes wild. Before-and-After photos go up, and they are indeed striking.

Still, the company stonewalls: “Steve’s health is robust and we have no idea where these rumors are coming from,” Apple’s VP of Communications says.

In June 2008 Jobs appears at the same event, and looks even worse. Again, the blogosphere goes wild. Again, the VP of Communications stonewalls: Jobs had “a common bug,” she says, but thought it was important to attend the conference. He’s taking antibiotics, but he’s fine.

Late in 2008 the Apple reveals what, in Apple circles, is a jaw-dropping decision by Steve Jobs not to present the upcoming MacWorld keynote. A spokesman says “it doesn’t make sense for us to make a major investment in a trade show we’ll no longer be attending.”

Two weeks later, on January 5, 2009, however, Steve Jobs writes an open letter stating that what’s really going on is a “nutritional problem” caused by a “hormone imbalance”:

“The remedy for this nutritional problem is relatively simple and straightforward…. But, just like I didn't lose this much weight and body mass in a week or a month, my doctors expect it will take me until late this spring to regain it. I will continue as Apple's CEO during my recovery.”

That same day, the Apple Board of Directors issues a statement:

It is widely recognized both inside and outside of Apple that Steve Jobs is one of the most talented and effective CEOs in the world [emphasis added].

As we have said before, if there ever comes a day when Steve wants to retire or for other reasons cannot continue to fulfill his duties as Apple’s CEO, you will know it.

Apple is very lucky to have Steve as its leader and CEO[ emphasis added], and he deserves our complete and unwavering support during his recuperation. He most certainly has that from Apple and its Board.

Nine days later, however, Jobs sends out another letter—a quite different letter—to the Apple community. “My health-related issues are more complex than I originally thought,” Jobs writes, announcing he is stepping aside as CEO, but will “remain involved in major strategic decisions” until he can return.

So the benignly simplistic view of his deteriorating health put forth with all deliberation by Apple’s own PR flacks, as well as Jobs himself, turns out to have been prematurely optimistic, or hopefully naïve, or just plain wrong, or patently false.And Wall Street is shocked, as the Wall Street Journal reports the next day:

Some investors said they were reeling from the disclosure. Charlie Wolf, a financial analyst with Needham & Co., said the "Steve Jobs health" factor could cause the stock to fall an additional 10% to 15%. He added, however, "If it were life threatening, I would anticipate that Steve would have resigned or the board would have called for his resignation."

Now, Charlie Wolf made his bones with one of the all-time great stock calls, recommending Apple stock before the iPod surge lifted the company back into the pantheon of Technology Greats, back when Michael Dell was saying the only thing to do with Apple was to liquidate the thing.

But any doctor who knows anything about what Steve Jobs has been going through will likely tell you that what Steve Jobs has is life-threatening—there is no such thing as a “good” kind of pancreatic cancer.

And how this is a shock to anybody—least of all Wall Street’s Finest—is hard to fathom, except for the fact that Apple’s Board of Directors appeared content to keep the Happy Talk flowing for nigh on five years.

Now, our concern here is not with the ghoulish aspects of Jobs’ health, or his desire to keep personal stuff to himself. For the sake of not only Apple, but the millions of individuals whose lives have been in some way transformed by the innovative products flowing largely through the narrow gate-posts of that man’s brain, I hope he lives another fifty years.

But of all the public companies in America, only two—Apple and Berkshire—so depend on their CEO that the health of that individual is front page news.

Indeed, Apple’s own Board of Directors publicly acknowledged its company is “lucky” to have “one of the most talented and effective CEOs in the world.”

How is it, then, that this same Board has allowed misleading happy talk to create a distorted picture of the well-being of that CEO, to the possible detriment of the company itself, and investors who may have been misled by the happy talk?

Who exactly decided it was a public company’s prerogative to allow what appears to have been highly misleading information—“cured,” “a common bug,” “hormone imbalance”—to be fed to the press and public, over a number of years?

In other words, when did Reg FD—Regulation Fair Disclosure, which requires material information to be disclosed to all investors at the same time—be replaced by Reg HT: Regulation Happy Talk?

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Wednesday, January 14, 2009

I saw a werewolf drinking a pina colada at Trader Vic’sHis hair was perfect.Dip!

—Warren Zevon, Werewolves of London

I saw a werewolf at an investor conference recently. His hair was perfect.

He’s the CEO of what is now a fairly large company thanks to a dozen or two acquisitions he and his CFO engineered over the years when their company was a Wall Street Darling and the Dynamic Due could do no wrong.

Having recently done wrong—at least, in the eyes of Wall Street—he seemed like a different guy than during the glory days.

Oh, he had the bling of all High-Flying CEOs: the perfect hair, the pin-striped suit, great tie and French cuffs. But what he didn’t have was the body language. He sat at the head of the table, rigid, dour, with his arms crossed, like a linebacker ready to block somebody’s head off.

All around him sat his team, including the loyal CFO with whom he had rolled up an industry and created what had once been a perpetual motion machine of deal, higher stock price, deal, and higher stock price, etc....

But those days are over, and our CEO had the look of an unhappy man, a man under great stress.The reason was not hard to find: he had announced his final Big One, the type of deal CEOs call “transformative” when they mean “really super expensive,” just a couple of months before the credit markets collapsed.

And it is obvious, in hindsight, that he paid way too much. And we’re not talking millions too much. We’re talking many many millions too much.

So here was, seated sat at a conference table ready to take questions in a room crowded with anxious shareholders who had bought the dream only to see it turn into a nightmare.

The first question from the disillusioned crowd was, as it always seems to be, about earnings guidance and whether the company had changed its mind about “the number.” A reasonable question, in light of, you know, like, the economic collapse going on outside the window at the end of the room—but not really the issue here.

The real issue is this: Mr. Werewolf here made a deal for the wrong price at the wrong time, and he knows it and we know it and the waiter clearing glasses at the end of the room probably knows it too, but nobody wants to come right out and say it, least of all Mr. Werewolf.

So Mr. Werewolf says there’s no change to the earnings—the number is staying the same. It could be higher, it could be lower, he adds stiffly, before glowering at the audience. “Not that the stock price reflects the earnings number anyway.”

Wow!

The man who piled, literally, billions of dollars of debt onto his shareholders’ backs at precisely the wrong time is castigating the audience for penalizing his company’s stock price!

A hand goes up: “So why not buy your stock back?”

Mr. Werewolf responds—he’s ready for this: “You mean personally? I’ve been buying it back when the window opens.”

The hand stays up: “No, I mean the company. If you really believe the share price is too low relative to the earnings, shouldn’t the company buy it back?”The background to the question, as everybody in the room knows, is that Mr. Werewolf and his CFO used to buy stock back with abandon during the glory days, at far higher prices than the current Too-Low-Price, in order to satisfy all the Return-Value-To-Shareholder types now waiting for the answer.

Mr. Werewolf responds by rote, straight out of the current Credit-Crisis Manual of Capital Preservation: “We’re using our excess cash flow to pay down debt. That’s the right thing to do.”

The hand stays up: “But isn’t that irrational? If your share price is too low, shouldn’t you be buying back the stock and keeping the debt outstanding? Isn’t paying down debt exactly the opposite of what you should do?”Mr. Werewolf looks at Mr. Rational like he wants to say something about how Mr. Rational should you-know-what-and-die. The CFO crains his neck to see who, exactly, is asking such a question.Mr. Werewolf finally answers, slowly, “It’s the right thing to do.”

The implication behind the words and the CFO's neck-craining is clear: Mr. Rational should shut up with the question about buying stock. Mr. Rational shuts up.Now, to quote that great philosopher, Robert Plant, it made me wonder.And what it made me wonder was this: why is it that CEOs take offense at good questions?Why is it that a shareholder or an analyst or even that lowliest of low-lifes, the short-seller, is made to feel like a pariah for merely asking a good, rational question in public?

And I wondered if this wasn’t why capitalism crashed: CEOs who make boneheaded decisions taking offense at being asked about the consequences of those boneheaded decisions in front of other human beings.And not merely taking offense for their own insecure reasons, butbeing encouraged to take offense by all the hangers-on—the investment bankers and the brokers and the mutual fund managers—who benefitted in the short-run from those boneheaded decisions, even though inthe long run they were nothing but boneheaded decisions.

After all, if a CEO can live the dream during the good times—wallowing in the Attaboys and the bonuses and the private jets and the closing dinners that came with every deal they made—why can’t CEOs sit down at a table and take the hit during the bad times?

How will boneheaded behavior ever change if it is not questioned, examined, argued and debated in public?

Further good questions from Mr. Rational discouraged, I left the room, humming Warren Zevon to myself:

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Sunday, January 11, 2009

“Don’t make me look like a jerk,” she told a reporter, “but I cannot bring myself to buy my children’s clothes at Wal-Mart.”

—The New York Times, January 1, 2009

The least pleasant article you will read today comes courtesy of the New York Times, which ventured into the far reaches of the Connecticut suburbs to see how the recently and not-so-recently off laid masters of the financial universe are coping with unemployment.

Turns out, the adjustment is at least as hard on the marital status of the couples involved as it is on the job-losers themselves, at least according to the Times:

Amy Reiss, a divorce lawyer in Manhattan, said that she had seen a spate of women seeking to end their marriages after they re-entered the work force or expanded their careers to replace their husbands’ income. The wives don’t resent working, she said. In fact, they’re pleased to contribute.

But “the husbands become what I call ‘clickers,’ ” Ms. Reiss said. “These are unemployed men who sit on the couch all day, holding the remote and watching TV, unable to step up and take over some of the household tasks and chores associated with raising the kids.”

Those women, she said, come to her looking for an exit strategy.

Lest you think you’ll find yourself feeling sorry for the wives whose lives have been upended by the New Post-Credit Bubble Economy, however, consider yourself forewarned that they do not come across sympathetically, either, as the following dialogue between a wife and her husband should make clear:

“Don’t make me look like a jerk,” she told a reporter, “but I cannot bring myself to buy my children’s clothes at Wal-Mart.”

“But do you have to buy them at Ralph Lauren?” Scott shot back.

The entire story can be found here:

http://www.nytimes.com/2009/01/11/fashion/11berrys.html?ref=business

We’ll try to have something cheerier to write about Monday. How about Warren Buffett as Morningstar’s CEO of the Year”?

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Friday, January 09, 2009

So there’s guy in the middle seat on the flight from JFK to Las Vegas. He’s maybe 35 or 40, tall and thin, nobody out of the ordinary.

It took him a long time to settle into his seat—he was wearing a long overcoat and scarf, and these he removed carefully and folded and stored them in the overhead compartment—but he seemed nothing out of the ordinary.

Still, there was one weird thing: he insisted on getting a blanket and a pillow from the flight attendant before take-off. He was nice about it, but insisent. How many business people worry about blankets and pillows on an 11 a.m. flight to Las Vegas?

Anyway, the flight took off only a half hour late, and headed down the New Jersey coast before turning west, and the guy was reading some business papers when the flight attendant said we’d hit cruising altitude and we could now use approved electronic yadda-yadda.

And that’s when the guy in the middle seat ordered his first Bloody Mary. He sipped it and read some papers and sipped it and read. And when it was done, with the blanket on his lap—kind of like a grandmother in a rocking chair—he fell asleep.

After nodding out for an hour or so, he woke up. And ordered another. Along with a Heineken. He read some more pages from a document marked ‘privileged’ at the top, then nodded out again, head down, hands clasped together on the blanket, dead to the world.

Then there was another Heineken and another Bloody Mary....

So now it’s almost five hours after take-off and we’re coming in south of Moab, descending slowly towards the desert. People are putting stuff away, talking, and just generally getting ready for the inevitable prepare-for-landing routine.

Except him. He’s asking the flight attendant if he has time for another Heineken. She says sure.

It’s his seventh drink of the flight, including four Bloody Marys.

Off the plane now, I see him standing in a corner of the gangway, putting on his coat and scarf and gathering his bags. Most of the others getting off the plane are yukking it up. Not him. He looks like any businessman, at any airport, adjusting his tie and straightening his collar. I feel like the worst kind of voyeur.

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

Tuesday, January 06, 2009

Tuesday, January 6, 2008: Dow Chemical admitted today that roughly 5,000 workers are being laid off in order to help pay the cost of acquiring Rohm & Haas at a price that makes no economic sense…

Actually, we made that up. Dow Chemical admits no such thing.

The company, which in July agreed to buy specialty chemical maker Rohm & Haas at a pre-Credit Crisis valuation of $15.4 billion—more than Dow’s current $14 billion market value—recently received a shock when Kuwait exercised economic prudence by backing out of a $9 billion joint venture that no longer made sense, thus depriving Dow of money to pay for Rohm & Haas.

So today, Dow released a whopper of a rationalization for not excercising its own economic prudence, in the form of a press release that begins as follows:

The Dow Chemical Company (NYSE:DOW) today announced a wide range of legal, operational and financial actions that will keep the Company on track to fulfill the transformational corporate strategy Dow has pursued since 2005.

Dow's strategy will continue to involve aggressive steps to establish Dow as a high-performance, earnings growth company organized around a strong portfolio of joint ventures and market-facing performance business divisions. Central to Dow's strategy is its commitment to retain a strong investment grade rating and to maximize shareholder return.

If that last sentence is suppposed to bear any semblance to reality, how is it possible that Dow continues to pursue the acquisition of a chemical company at a pre-Credit Crisis price which even Wall Street’s Finest consider to be as much as, oh, a third too rich?

Well, one way is layoffs, as today’s press release trumpets:

Since the onset of the global financial crisis in September 2008, Dow has taken aggressive actions to reduce capital spending, working capital and operating expenses. With further weakening in the global economy, Dow announced a restructuring in December which will reduce the Company's workforce by approximately 11 percent, close facilities in high-cost locations and divest several non-strategic businesses. "We undertake actions like these with a very clear outcome in mind -- to preserve our financial flexibility and improve our financial performance.

In the final paragraph of the release, labeled “About Dow,” the company claims 46,000 employees worldwide.

So the real headline should be more like, “We’re Firing 5,000 Workers So We Can Make a Stupid Acquisition.”

The content contained in this blog represents the opinions of Mr. Matthews.Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.